SEBI’s Intraday Trading Survey May Not Be All That Bad

If you have been in the stock market, you would have surely learned that the market is a great teacher. It has humbled even the biggest investors, including the late Rakesh Jhunjhunwala.

The recent survey of market regulator Securities and Exchange Board of India, based on clients of the top 10 brokers, says that seven out of every 10 day traders lost money. This may be incomplete, in the sense that it only considers the intraday trading part.

It does not share insights into how many of the new 6.5 crore investors added to the stock market since Covid-19, invested in cash markets, participated in the IPO markets and how wealth may have been created. It would be entirely wrong to assume that the new investor only does intraday trading and does not invest in stocks or IPOs. This is because only 36% of the total client base in the cash market of the top 10 brokers undertook intraday trading.

A substantial portion of investors have used their household savings to dabble in stock markets—invest in stocks, profitably exited IPOs on listing day and tried their hand at intraday trading.

Having said that, there is no doubt that new investors lose money in the first three years of stock market trading, especially if they are day trading or intraday trading.

There are a few insights that come out from the survey, and since it has a sample size of 69.8 lakh unique clients, it can be extrapolated.

There is a learning process for new investors and losses reduce the more you stay in the markets. Seven out of every 10 day traders end up in losses in the first year and reduce in the subsequent years.

The survey also brings out the experimenting nature of investors in the intraday market—73.2% of the day traders have annual intraday turnover of up to Rs 5 lakh, with 73.6% of the ridiculously small investors having average trade size of under Rs 25,000. A substantial number of them would be under 30 years old—college students, new entrants to the job market, etc.

NSE, in its June Market Pulse, highlighted that 48% of the new investors are under the age of 30.

The survey also underscores the fact that a large number of new investors are taking up day trading and investing as full-time occupations. Over 12% of the sample undertake more than 100 trades during the year. Intraday trading requires continuous monitoring and participation, and many traders are spending dedicated time in the market.

The data also points out that 92.4% of the sample contributes only 9.6% of the trade value. Which means over 90.4% of the trade value falls under the category of investors undertaking more than Rs 1 crore of intraday turnover annually. And so, a large number of losses are accounted by this class of investor. The survey infers that as the day trader turnover rises, so does the losses. But it also states that the proportion of losses declines, if the investor continues intraday trading over a three-year period.

The interesting fact is that the proportion of female traders among the intraday traders count declined to 16% in FY23 from 20% in FY19. It would also mean they may have become duration investors instead of exiting the markets. This is because the proportion of profit-makers among the group of female traders was higher as compared to the group of male traders, across all the three years.

Further, the risk-taking ability is lower among married individuals as compared to single ones.

But two clear action points come from this survey. The trading costs are extremely high. Trading losses expand by 57% for investors for loss-making trade and profit declines by 19% for investors with profit-making trades. It also means the house always makes money i.e., brokers. The recent true-to-label guidelines of SEBI may bring down the trading costs, if exchanges impose lower costs on brokers. It is now for brokers to pass on these savings to the investors.

The major concern that emanates from this survey is that the proportion of losses increase as one moves from tier-1 to tier-2 to tier-3. This is primarily because of information asymmetry. Data speeds though have improved but it is slower in tier-2 and tier-3 towns and cities and therefore, the trade speed delays increase proportion of losses.

Further, though all information to investors is disseminated at the same time, the processing of this information is faster in tier-1 as compared to tier-2 and tier-3 cities. And so, by the time a small investor can put in a trade, the prop and tier-1 trader may have already taken the bulk of the profit away. This market anomaly will change over the next few years, as evidenced from the fact that there is a five times jump in tier-2 investors and 10 times jump in tier-3 investors since FY19 i.e., nearly a quarter of the new investors came from non-tier 1 cities in FY23. And this trend increased in FY24.

Having said that, wealth creation happens through investing and not via intraday trading.

Be a smart investor!